Yes, Let's Expand Social Security - To Public Sector Employees

Retirement
I write about retirement policy from an actuary's perspective.

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In a prior article, I referenced offhandedly the generous nature of the benefits for teachers and other state and local government employees. Here in Illinois, a teacher hired before 2011, who worked continuously after graduating college, is eligible for retirement, at a 75% pay replacement increasing at a compounded rate of 3% per year, at the age of 56. This is a benefit level that, even in the days of generous private-sector traditional defined benefit pensions, would have been exceedingly generous.

As it happens, these high pensions, and the inclusion of a generous COLA, are frequently justified by the fact that these participants don't participate in Social Security, at least in the 15 states in which this is the case (a list which, as far as teachers are concerned, includes two of the most notoriously underfunded plans, Illinois and California; with respect to other public-sector unions, Social Security opt-outs are rarer, or, as in the case of Illinois, some groups do and others don't participate).

And those retirement plans which stay out of Social Security portray it as the best choice for both plan members and the state. The Illinois Teachers' Retirement System says this:

Currently, teachers pay 9 percent of their salary and school districts pay 0.58 percent of its teachers’ salaries to TRS. The federal Social Security tax is 12.4 percent, split evenly between the employee and the employer. For school districts, placing teachers in Social Security would result in a 137 percent increase in total taxes and contributions devoted to retirement. TRS members would see their total retirement contribution rise to 15.2 percent of pay, a 68 percent increase.

Teachers' Retirement System retirement benefits were significantly better than those offered under Social Security. . . .

Along with the increased cost to local governments for Social Security, adding teachers to the system would not wipe out the $122.9 billion that TRS currently owes all active and retired TRS members for the next 30 years. These are retirement benefits that already have been earned. . . .

A 1999 study by the General Accounting Office found that adding teachers and other public employers from around the country who are not currently in Social Security would create, at best, a temporary surge in revenue for Social Security. Over the long term, adding teachers to Social Security would only increase the System’s total obligations and deepen the program’s long-term funding problem.

But that's misleading in a number of ways.

In the first place, touting the higher costs to teachers and school districts omits the high cost to the state of funding that portion of teachers' benefits which is not covered by the small teacher/district contribution.

In the second place, benefits are indeed generous -- for full career teachers or state employees. But, as an explainer video at TeacherPensions.org points out, nearly half of all teachers won't continue teaching for long enough to vest in a pension, and another third will vest, but with poor levels of benefit accruals. With respect to other public employees, an analysis showed that about half of plans required five years of service to vest, and another 20% required 10 years; only 16% required less than 5 years. A teacher who moves from one state to another, or who leaves teaching for another career field, may be as good as starting over, as far as retirement benefits are concerned.

And while vesting requirements are perfectly normal in the private sector -- though by law the requirements are less demanding, typically 3 years for a 401(k) employer contribution or 5 years for a traditional defined benefit plan -- and it is perfectly ordinary to move employers often enough to accrue low or no benefits in any given employer, Social Security always serves to provide a basic level of benefit, regardless of whatever other pension one might have. Social Security is always portable, always vests immediately, and, crucially, indexes wages to adjust for inflation when calculating benefits at retirement, unlike frozen benefit accruals when one leaves an employer.

And finally, while the TRS correctly observed that existing liabilities could not be erased with participation in Social Security, it would provide greater financial stability for a state to do so going forward. To the extent that such a benefit change were to produce a benefit formula integrated with Social Security rather than simply making public sector pensions even more generous, it would shift at least some of the future pension accruals' cost into predictable contributions and take away the temptation, at least for that portion of the benefit, to defer contributions to future taxpayers.

Having said this, yes, it's also the case that the federal government cannot force states to participate in Social Security -- at least not directly. But I will remind readers of my longtime pet Social Security reform proposal, in which Social Security as we know it today would be replaced by a flat benefit paired with some sort of mandatory participation in pooled retirement accounts. And I will further remind readers that this is, in broad outline, the system which has been implemented in the U.K. in recent years. In such a case, if, in the case of the flat benefit, benefits were funded out of income taxes/general tax revenue rather than a dedicated payroll tax, there would be no way in which states could opt out of the system because there would be no employer role.

And, to be sure, this is only one small piece of a much larger issue, but it is a relevant item to take into consideration.

Yes, I'm a nerd, and an actuary to boot. Armed with an M.A. in medieval history and the F.S.A. actuarial credential, with 20 years of experience at a major benefits consulting firm, and having blogged as "Jane the Actuary" since 2013, I enjoy reading and writing about retir...